Volatility Markets Underreacted to the Early Stages of the COVID-19 Pandemic

Review of Asset Pricing Studies, Forthcoming

Tuck School of Business Working Paper No. 3580531

51 Pages Posted: 22 Apr 2020 Last revised: 3 Aug 2020

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

Dartmouth College - Tuck School of Business

Date Written: July 21, 2020

Abstract

VIX futures prices rose slowly in late February and early March 2020 as the COVID-19 pandemic took hold. Futures price premiums, defined as futures prices minus real-time statistical forecasts of future VIX values, turned sharply negative and remained negative until mid-April. Trading strategies based on estimated premiums profited from the subsequent increase in market volatility and equity market crash. The underreaction of futures prices to growing pandemic risks poses a puzzle for standard asset pricing models.

Keywords: VIX futures, COVID-19, Variance risk premium

JEL Classification: G13, G40, G11

Suggested Citation

Cheng, Ing-Haw, Volatility Markets Underreacted to the Early Stages of the COVID-19 Pandemic (July 21, 2020). Review of Asset Pricing Studies, Forthcoming, Tuck School of Business Working Paper No. 3580531, Available at SSRN: https://ssrn.com/abstract=3580531 or http://dx.doi.org/10.2139/ssrn.3580531

Ing-Haw Cheng (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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